Sovereign Gold Bonds (SGBs) are government securities denominated in grams of gold. The Sovereign Gold Bond (SGB) Scheme was first launched by Government of India (GOI) on October 30, 2015. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bond is issued by Reserve Bank, in both demat and paper form on behalf of Government of India. The Bonds will be denominated in multiples of grams (s) of gold with basic unit of 1 gm.
Features of Sovereign Gold Bond Schemes
- Bonds are secured against physical gold holdings of the government
- The bonds will be available both in demat and paper form
- SGBs can be used as collateral for loans. This bond is as liquid as physical gold and could be exchanged for money at the time of financial need.
- The quantity of gold for which the investor pays is protected, since he receives the ongoing market price at the time of redemption/ premature redemption.
- Tenor of the Bond is available for a period of 8 years with exit option after the 5th year
- Sovereign gold bonds will be redeemed for cash at the end of the investment tenure and the redemption will take place at the prevailing gold price.
- SGBs are free from issues like making charges and purity which is there in the case of gold jewellery.
- The bonds are held in the books of the RBI or in demat form thus, eliminating risk of loss
Eligibility Criteria: Who can invest in the SGBs?
All Indian residents as defined under the Foreign Exchange Management Act, 1999 are eligible to invest in Sovereign Gold Bonds. Eligible investors include:
- Individuals (Single or joint holding)
- Charitable institutions
Note: Minors can also apply for this scheme but for this, parents or legal guardians will have to submit the application on their behalf.
How much one can invest in Sovereign Gold Bond?
The minimum one can invest is 1 gram of gold and the maximum limit varies as per the categories given below. The maximum investment limit per fiscal (April- March) is as follows:
- Individuals – 4 Kg of gold (In case of joint holding, the limit applies to the first applicant)
- Hindu Undivided Family (HUF) – 4 Kg of gold
- Trusts and similar entities – 20 kg of gold
What is the rate of interest applicable on SGBs?
One can earn interest on the amount of initial investment at the rate of 2.50% (fixed rate) p.a. The interest will be credited semi-annually to the bank account of the investor and the last interest will be payable on maturity along with the principal.
How to invest in Sovereign Gold Bond?
- Interested investors can either apply online or offline by either downloading the application(KYC) form from the RBI’s website or get it from authorised branches.
- If a customer opts online mode and makes the payment through the website of the listed commercial banks, then the issue price of the gold bonds will be Rs.50/gram less than the nominal value for those investors.
- If the customer meets the eligibility criteria,produces a valid identification document and submit the application money on time, S/he will receive the allotment.
- The customers will be issued certificate of holding on the date of issuance which can either be collected from the bank you have bought SGBs from or obtained directly from RBI on email
- Investors will be given one unique investor ID which will be used for all the subsequent investments in the scheme.
Note: The price of gold will be published on the RBI website two days before the issue opens.
What will I get on redemption?
On maturity, the redemption proceeds will be equivalent to the prevailing market value of gold (per gram) originally invested. The selling price of Sovereign gold bond will be decided on the basis of closing price of 999 gold purity of the last 3 business days of the week from the date of repayment, published by the Indian Bullion and Jewelers Association Limited.
How can I redeem the Sovereign Gold Scheme?
The tenor of the SGBs is 8 years. However, one can also encash/redeem the bond after 5th year from the date of issue on coupon payment dates.
On maturity: The investor will be advised one month before maturity. On maturity, the gold bonds will be redeemed in Indian rupees based on the selling price published by the Indian Bullion and Jewelers Association Limited. The interest and redemption proceeds will be credited to your bank account.
Premature redemption: Investors need to approach the concerned bank, or issuing authority 30 days before the coupon payment date. The request for premature redemption will only be entertained if the investor approaches the concerned bank at least one day before the coupon payment date.
There are certain aspects which investors should know about Sovereign Gold bonds:
- For holding securities in dematerialized form, quoting of PAN in the application form is mandatory
- Nomination facility is available to invest in Sovereign government bonds
- TDS is not applicable on SGBs. However, it is the responsibility of the bond holder to comply with the tax laws.
Sovereign Gold Bonds as Collateral for Loans
Sovereign Gold Bonds are eligible to be used as collateral for loans from banks, financial institutions and non-banking financial companies (NBFC). The loan to value ratio will be the same as applicable to ordinary gold loans prescribed by RBI from time to time. However, granting loan against SGBs would be subject to the decision.
Tax Implication on SGBs
The interest on Sovereign Gold Bonds is taxable as per the provision of Income Tax Act, 1961 (43 of 1961). On redemption, the capital gains tax to an individual has been exempted. The indexation benefits will be provided to long term capital gains arising to any person on transfer of bond.